Daily: Managing equity exposure amid tech volatility
The technology sector came under heavy selling pressure this week, with the Nasdaq falling by around 1.5% for three consecutive days, on track for its biggest weekly loss since US President Donald Trump announced his sweeping tariffs in April last year.
The latest sell-off was triggered by Anthropic’s release of various plug-ins, including for legal, sales, finance, and analytics applications on its agentic AI platform. The market is increasingly concerned about the disruptive potential of AI-native models to replace incumbent non-AI-native software, and the developments raise questions about how legacy software business models will adapt to AI-enabled and AI-first software businesses.
Meanwhile, big tech companies have raised their capex guidance above prior expectations, signaling continued strong conviction in the future of AI, but also triggering renewed investor worries about potential returns on AI spending.
Exposure to the AI theme remains critical for long-term wealth preservation and appreciation. In our view, the launch of application-specific plug-ins demonstrates the rapid advancement of AI models, as they integrate application-specific functionality into their core capabilities. This narrows the gap between the intelligence and application layers of the AI value chain, and highlights the transformative potential of AI. We believe this underscores that exposure to the AI opportunity remains essential in one’s portfolio.
Earnings delivery remains on track. Despite mixed market reaction, the latest set of tech results has been resilient. Fourth-quarter earnings growth for Nasdaq companies is on track to reach 20%, six percentage points higher than initial projections. Forward-looking expectations have also strengthened, with consensus forecasts now pointing to earnings growth of 26% for 2026, about eight percentage points higher than estimates made just a few months ago. While investors have repriced valuations for software companies, most firms in the segment delivered earnings that exceeded expectations by about 6-7%, with consensus for 2026 and 2027 trending higher.
Balanced positioning is important to manage risks. We acknowledge the risks reshaping software economics and believe investors should maintain roughly a 10% allocation to software within their broader tech exposure. We continue to advocate a balanced positioning across the enabling, intelligence, and application layers of the AI value chain, and see particular value in companies and sectors that can use and apply AI to improve business outcomes.
Diversification across geographies should benefit investors. The recent market movement exposes the potential vulnerability of portfolios concentrated in individual regions, sectors, or industries. While we believe there is room for US equities to move higher against a favorable macro backdrop, we also see appealing opportunities across Asia and Europe. Japanese equities, for example, are likely to be further boosted by strong earnings and reform momentum, with a potentially supportive election result in the coming days likely to attract renewed foreign inflows. China, meanwhile, offers re-entry opportunities after recent consolidation, as AI innovation and earnings recovery should set the stage for renewed momentum. We also like Europe amid an improving cyclical outlook, a more favorable structural backdrop, and reasonable valuations.
We maintain our view that opportunities in equities this year should expand across geographies, sectors, and structural themes, and investors with concentrated positions should diversify their exposure. Tools to do this may include yield-generating structured strategies that generate income while waiting to buy assets at lower prices than today, and/or instruments that help investors to sell down concentrated positions at set prices in a systematic way.
